The impact of Credit Score Movement on Financial Equality

Created by Dall-E

Data silos are a significant challenge for many financial institutions across the world. This challenge is partly a result of managing legacy systems and a lack of data exchange between financial institutions, negatively impacting operational efficiency and, in the end, customer experiences. While financial institutions have access to potentially helpful customer information, the inability to access this information in a centralized way can make it challenging to deliver the great customer experiences that should follow.

Today, one of the critical problems that consumers face is the constant battle of having to prove their financial credibility every time they move to a new country, adding one more challenge in starting their new lives.

As the global economy continues to evolve and integrate, the concept of the movement of credit scores across borders is likely to become increasingly important, and technology is already playing a significant role in supporting individuals and businesses to access financial services in different countries and eventually increase financial inclusion and stimulate economic growth.

Why is this not standard practice yet?

While the movement of credit scores across borders has the potential to benefit individuals and businesses greatly, several challenges and obstacles need to be addressed to implement this concept successfully.

The main challenge is the need for standardization in credit scoring systems across different countries. Each country may have its credit scoring system, with other criteria and methods for assessing creditworthiness. This can make it difficult for financial institutions to compare credit scores from different countries and make informed lending decisions. As a result, there may be a need for international standards and frameworks to enable the comparison and exchange of credit scores across borders. At the same time, financial institutions are skeptical about the concept since the risk of fraud and financial crimes are at an all-time high. Allowing credit scores to move freely across borders may make it easier for bad actors to take advantage of the system and commit scams and other illegal activities. This can create risks for lenders and borrowers and may require additional measures to prevent and detect fraudulent activity.

Finally, implementing cross-border credit score movement may pose political and regulatory challenges. Different countries may have additional regulations and policies regarding the direction of credit scores, and there may be resistance to changes that could impact the national financial system. This may require international cooperation and coordination to develop a framework for the movement of credit scores across borders.

Technology as a facilitator of change in the new movement

Technology can become the critical facilitator of the cross-border credit score movement as the world becomes more interconnected. With the use of innovative solutions and advanced systems, individuals and businesses will be able to easily access and transfer their credit information, allowing them to seamlessly transition to new countries and continue to build their financial credibility. This not only makes it easier for individuals to start their new lives, but it also has the potential to increase financial inclusion and stimulate economic growth. By leveraging technology, we can create a more equitable and efficient financial system that empowers individuals and businesses to thrive.

To date, we have seen companies using advanced technologies mostly around cloud-based data storage and analysis, blockchain, and artificial intelligence to tackle the basic challenges of cross-border scoring.

1. Machine learning and artificial intelligence (AI) technologies can be used to analyze and evaluate large amounts of data on an individual’s or business’s financial history and creditworthiness. This can help improve credit scores’ accuracy and reliability and make it easier for financial institutions to make informed lending decisions.
2. Blockchain technology could create a decentralized, secure database of credit information that financial institutions across different countries could access. This would allow for more accurate and reliable credit scores, as the information would be verifiable and tamper-proof. Additionally, using smart contracts on the blockchain could automate the process of updating and verifying credit information, making it more efficient and less susceptible to errors.
3. Cloud-based data storage and analysis can help to reduce the cost and complexity of maintaining and updating credit score data, making it more feasible for financial institutions to use and share credit score data across national borders. This can help to increase access to credit and financial services, particularly in developing countries where access to traditional banking services may be limited.

Of course, the list is limited since financial technologies are still evolving, and rethinking credit scoring is high in financial institutions’ priorities.

Who’s going to make it happen?

Building an inclusive financial system for the world: Nova Credit

Nova Credit’s core innovation is a global credit scoring and reporting format, the Credit Passport®. It contains a local-equivalent score, tradelines, and inquiry history, allowing consumers who have recently arrived in a new country to attempt to demonstrate their creditworthiness to lenders. Using Nova Credit, partners like American Express, MPOWER Financing, and Yardi can seamlessly underwrite qualifying newcomers without a local credit score. The company has raised more than $80m and is backed by Kleiner Perkins, Index Ventures, General Catalyst, HSBC Ventures, Endeavor Catalyst, and others.

Transforming the creditworthiness of individuals: Finclude

Finclude is on a mission to become the pan-European credit scoring provider. The company is developing a credit scoring system that enables individuals and financial institutions to universally assess the affordability and creditworthiness of individuals by utilizing machine learning on top of open banking APIs. Finclude is authorized and regulated by the Central Bank of Ireland and has raised $2M from grants and angel investors to date.

From concept to reality

In conclusion, the credit score movement has the potential to have a significant impact on financial equality. By creating a more accurate and reliable scoring system, the credit score movement could help to level the playing field and provide greater access to financial services for individuals and communities who have historically been underserved or disadvantaged. This could lead to increased financial inclusion and opportunities for wealth creation and could help to reduce disparities in financial well-being. Realizing this potential will require careful planning and collaboration among stakeholders in the financial industry; however, with the rapid advancement of technology, it is becoming increasingly feasible and practical.

The initial thought behind this blog was to empower everyday readers to understand and stay informed about technologies that are shaping our world. In Discovery Series, my main priority is to demystify complex technology concepts and showcase the creativity and innovation happening in the startup world. If you have any feedback, recommendations, or thoughts, feel free to contact me at my email or Linkedin.